Bankless - The PoW vs. PoS Debate | Lyn Alden & Justin Drake

Starting point is 00:00:06 Welcome to bankless. We're weeks for the frontier of internet money and internet finance. This is how to get started, how to get better, and how to front run the opportunity. This is Ryan Sean Adams. I'm here with David Hoffman, and we're here to help you become more bankless. Guys, you are in for a treat today. We've got two experts on proof of stake and proof of work, and they are debating the subject over which is better for creating a global money system, a crypto money system, proof of work or proof of stake. Lynn Alden and Justin Drake on the episode today. We're going to talk about a few things. Number one, which provides the most economic security, proof of work or proof of stake? Number two, which provides the best deterrence and recoverability in the face of the dreaded

Starting point is 00:00:50 51% attack? Number three, which minimizes governance power for the elites, which is more power to the people. Number four, which is economically the fairest system to participate in? And number five, and this is personally my favorite, this conversation around proof of work being more commodity money and proof of stake being more equity money. Is that correct? That's what one of our debaters believes, and we dive into that as well. David, why don't you tell us a little bit about the format of this episode? Because it was a fantastic format in that the participants, like, I felt like for times during this episode, you and I could just sit back and watch the participants go over their points.

Starting point is 00:01:32 and articulate them well back and forth. It was like watching a tennis match of like serve and then a volley and then like back and forth, back and forth. Yeah, the first half of the episode I'd say just wrote itself. Seriously debated going back and like making a bag of popcorn because the first half, the first half of the show as host, we didn't have to do a damn thing. Yeah, Lynn and Justin just took it in of themselves and took this conversation in their own direction. And then you and I as host again started in the second half of the show really to actually direct the conversation and summarize things that were said and digest things that were said.

Starting point is 00:02:03 And so this is kind of how this episode is bisected down the middle. But then I would also say I really enjoyed the closing statements as well, just allowing both Justin and Lynn to really just summarize holistically their entire scope for why Lynn believes that proof of work is a better money system and why Justin believes proof of sake is a money system. So there is so much knowledge baked into this episode. This is going to be one of the ones that we're going to have to relisten to to really fully extract all of just the fantastic knowledge that is here. And overall, I'm just

Starting point is 00:02:34 very happy that in this very tribal world of crypto, that we have people like Lin Alden and Justin Drake who can come to a podcast and just talk about things without the yelling that you would find on Twitter spaces and without the jabs that you would find just a very respectful conversation, which I know is important for the listeners because it's just a pleasant debate to listen to. So I'm so happy that we were able to produce this podcast here, Ryan. Imagine having an adult conversation about crypto. It's impossible to do on crypto Twitter and other locations, but that's what was had today. It's fantastic points by both sides of this argument, well articulated. One thing David and I are going to do is have a conversation about the conversation that was just had. We have that on an episode. We call the bankless debrief. You get that if you were subscribed as a bankless premium member. David and I are going to talk about the merits of both sides. Maybe your mind was changed, David, in this debate. Maybe. Maybe. There are some points that Justin brought up, maybe some Lynn points that we'll have to talk about. So I'm looking forward to that conversation.

Starting point is 00:03:34 If you're a bankless premium member, you can look forward to that conversation too. It should be available to you now. Just upgrade to premium membership. We're going to get right into the conversation with Lynn Alden and Justin Drake. But before we do, we want to hear about the fantastic sponsors that made this episode possible. If you're going bankless, you need Metamask. This is your tool to unlock the world of Defi. without giving up custody over your private keys.

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Starting point is 00:06:15 the Ledger Live app, right next to all the Defy apps and services that you're already used to doing, like swapping tokens and staking. So if you don't have a Ledger hardware wallet, go to Ledger.com, grab a ledger and take control over your crypto. Bankless Nation, we are super excited to introduce you to our next guest and host this conversation about proof of stake versus proof of work or flip that around, proof of work versus proof of state, depending on what side of the conversation you're on. I wanted to introduce you to repeat bankless podcast guests, founder of Lynn Alden Investment Strategy, Lynn Alden.

Starting point is 00:06:48 She's a leading expert in macro markets. Lynn Alden has been a leading expert commentator on macro. She's been a proponent of Bitcoin for a long time. She generally believes that proof of work is more suited to producing a new global money system than proof of stake. She also wrote an article on this topic that was widely read, very well circulated, and well argued. So we've got Lynn on the one side who is pro proof of work and critical of proof of stake. Lynn, welcome to bankless. How are you doing?

Starting point is 00:07:17 Happy to be here. Fantastic. On the other side of things, we have Justin Drake. Justin Drake is also a repeat bankless guest. He is a researcher at the Ethereum Foundation. He's the pioneer of ETH as ultrasound money. You may have heard that meme a few times before. He's also been hard at work at helping Ethereum transition to proof of stake.

Starting point is 00:07:35 So, of course, he is a believer in it. And he believes that proof of stake produces an asset with the properties that the 2020s will need with the monetary properties, that is. So he's on the side of pro proof of stake, and he's more critical of proof of work. Justin, how are you doing? Welcome to Bankless. Doing great. Thanks again for having me.

Starting point is 00:07:52 Guys, okay, we're super excited to host this debate, this conversation, if you will. I know you both have some fantastic points to go through. I want to start with kind of the big question, I think we're settling, and see if we have some agreement on that big question, which is I think we're trying to answer the meta question of whether proof of work or proof of stake is most amenable to the accrual of monetary premium. basically which of those two consensus protocols are most amenable to making a cryptocurrency a money have monetary premium do you guys agree before we get into kind of the the subtopics here

Starting point is 00:08:33 that this is the correct framing of the whole conversation we're trying to answer which consensus protocol has a better monetary premium potential justin why don't we start with you yeah i think that is the big question and it kind of boils down to what the consensus is all about. It's about security. And so we can kind of look at a consensus mechanism through the lens of economic security, for example. We could look at it through the lens of government security. To what extent does the community have control over the consensus participants, which are meant to just be doing that job of maintaining the blockchain? We can look at physical security, which one is more liable to attack from violence in the context of nascent states, for

Starting point is 00:09:24 example. We can look at quantum security. And we can even maybe look at meme security. Monetary premium to a large extent is about having the best memes. And I believe that proof of stake has the potential to have much better memes than proof of work when it comes to looking at cash flows. But that's, I guess, something we'll discuss later. Lynn, I want to get your way in on this. So do you think that this is the question we're trying to answer is which sort of consensus mechanism is most amenable to the accrual of monetary premium proof of work or proof of stake? Or would you reframe this in a different way? I think that's a good way to phrase it.

Starting point is 00:09:59 And in the current system, we have, you know, not on the blockchain, but we have proof of work and proof of stake assets essentially, right? So equities, because you, you know, you own a stake in that company, you have a proof of stake, right? And so your stake allows you to exercise some degree of control over that company. whereas, of course, we have normal commodities that are proof of work assets, more or less. And what we've seen over history is that either asset can acquire some degree of a monetary premium, right? So, for example, in this era of bad money, stocks have acquired, in some cases, a monetary premium.

Starting point is 00:10:30 So you can have assets of either case that have monetary premium. And so the question becomes what is most suited to our monetary premium and what is able to acquire and then hold for the very long run and accrue a structural monetary premium. I really want to kind of interject almost at the very beginning here and kind of argue why this analogy with equity and proof of stake is maybe a bad analogy. And the reason is that in the context of equity, you have the right to vote on anything. You can completely change the rules of the company. But in the context of proof of stake, actually there is a bit of ambiguity. You could have proof of stake governance and you can have proof of stake consensus. So some chains like Tesos, like PolkaDot, like DFINITY,

Starting point is 00:11:14 they empower their token holders to make arbitrary changes to the rules of consensus. And that can happen even without a fork. If there's a sufficient quorum, the rules kind of automatically change on chain. But in the context of proof of stake as a consensus mechanism for security, the consensus participants can't just arbitrarily change the rules. So, for example, and I think this is something we can both agree on, the consensus participants can't say we're just going to give ourselves, you know, a thousand if each, because that would be kind of an invalid transaction, an invalid block. And so ultimately, the consensus participants are beholden to the community, and that is a huge difference relative to equity. And if we really want to go down this equity metaphor, then we kind of need to think of how proof of work would be equity-like.

Starting point is 00:12:07 And it is equity-like in the sense that the consensus participants, those who have hash rate, have this very constrained voting power only in the context of consensus, not in the wider context of governance. Guys, I think everyone here is really eager to get into the details. And we jumped ahead a little bit with that, Justin. So I'm going to zoom out and kind of give a roadmap for the listeners before I give it right back to Lynn. In order to answer the question, which produces the best monetary premium, there's a bunch

Starting point is 00:12:35 of sub questions. One of those is like the commodity versus equity debate with which we just kind of hopped into. And so we'll start with that first. But the other things that we're going to talk about on this show are things like 51% attacks, which system can recover, deter and recover from 51% attacks, economic security, which provides the most economic security, fairness and decentralization, which one is economically fairest for participants. And kind of what we were just talking about, commodity money versus equity money. Lynn generally thinks that. that proof of work produces commodity money or money with commodity properties and proof of stake produces money with equity properties, as we just alluded to. And that is, I guess, where we're going

Starting point is 00:13:14 to start this debate as we've hopped into it already. So, Lynn, do you want to just keep on going with that conversation about proof of work as commodity and proof of stake as equity? So I agree that there are different types of proof of stake systems, right? So they're ones to give you more control than others. You know, if I were to focus on, say, defining proof of work as, commodity money, I would also even go to far as to say that if you have a proof of work system that has difficulty bombs or that has, say, very large blocks or just, you know, very, you know, hard to run your own node, that starts to have equity-like systems as well. And so, for example, you can have some of the hard forks away from Bitcoin start to look more equity-like

Starting point is 00:13:52 because it kind of consolidates the number of people that can make decisions for that protocol, rather than being a fairly immutable protocol, as you would generally see in a commodity, right? So producers have no influence over the properties of copper. For example, that's an example of a commodity money or a commodity in general. And so going back to the proof of stake to equity analogy, we can point out that, for example, shareholders in a corporation can make changes. But of course, they can't make changes that violate the law of the country that they have a jurisdiction in or that places they operate in.

Starting point is 00:14:24 So they're still bound by things that are outside of just their stake in that company. And that would be true for this as well. And so in this context, the proof of stake would refer to the fact that people that hold the capital are the ones that get decided which transactions are processed, more or less. That's what their stake is rather limited to. Right. So if we want to take kind of a technical perspective, I guess the consensus participants can try and do two things. One is they can try and do a hard fork, which is basically to make transactions which are not valid and somehow make them valid. And as you say, this is the context of the law. There's this law which is set. by users, which cannot be violated by the consensus participants. And then there's this other thing that they can try and do is basically, as you said, restrict the set of transactions that can be processed. And so this is what's called a soft fork,

Starting point is 00:15:15 which is basically a form of censorship where transactions that used to be valid are no longer being processed, and so they're effectively invalid. And so I do agree that consensus participants have this ability to do, censorship. And then the question becomes, if we want to compare proof of work to proof of stake, which one is least liable to these censorship attacks? And here what we need to do is we kind of need to zoom out all the way to the social layer, because this is where the social layer needs to intervene. And it turns out that one of the massive advantages, in my opinion, of proof of stake, is that the social layer has the tools to go intervene whenever they're

Starting point is 00:15:59 is censorship by the consensus participants, whereas proof of work does not have that. Now, in terms of things that you mentioned, like the difficulty bomb, small blocks versus big blocks, these are things that I believe are somewhat offogonal to the discussion today. And I think one way to really focus the discussion on the topic of specifically proof of work versus proof of stake, which is a tiny part of consensus. It's kind of interesting how this proof of work versus proof of stake is actually all about restricting the set of consensus participants that can come in. It's an anti-Cibble gadget. And, you know, there's other things as part of consensus. There's the folk choice rule.

Starting point is 00:16:39 There's mercilization. There's DVM versus UTXOs. There's big blocks versus small blocks. There's all sorts of other things. But I think in order to have like the simplest discussion possible, maybe we could compare a hypothetical Bitcoin proof of stake versus a Bitcoin proof of work. Or we could just look at Ethereum proof of steak versus a fair and proof of work. But if we start, you know, talking about things outside of Canada's as apples to apples comparison, then the discussion becomes quite convoluted. I'd like to go back into the kind of commodity money versus equity money type of discussion. So, Lynn, I want to understand kind of your take here.

Starting point is 00:17:19 Is it the case that you believe that any kind of proof of stake produced monetary premium or money is more like equity and less like a commodity, or is there some like granularity there in kind of your belief? I think you just expressed in what you were saying previously that some proof of work systems can actually become a bit more equity-like and less commodity-like. Is the same true of proof-of-stake systems? Can they become a bit more commodity-like and less equity-like in your mind?

Starting point is 00:17:54 So I think there is some to give spectrum, but I think for the most part, it's a rather one-directional street in the sense that there are multiple ways to become an equity, but very few ways to become a commodity in that sense. And so commodities by their nature are somewhat rare. They're immutable. And there are so many things that require governance in our world. And so, you know, especially when we're talking about the topic of decentralization and immutability, there are multiple ways to essentially become an equity. And there are multiple ways to define what an equity is in that context. And so I would say it's for the most part, you know, the ways to create a true kind of commodity

Starting point is 00:18:30 in the digital realm is extremely limited. And that's why I bring up the block size. I agree that we should focus almost entirely on the proof of work versus proof of state concept. But my point of bringing that up is that even among, even in proof of work, there are multiple traps to fall into to create a system that ends up being more equity-like in the sense that those with capital and those, you know, with outsized influence can control the network compared to having one that's truly decentralized and as close to immutable as you're going to get in the digital realm. That's how I'd phrase that.

Starting point is 00:18:58 Do you think part of the difference here, Lynn, is that like a difference of ossification, right? So some networks, like maybe say a Bitcoin, for instance, has far fewer governance decisions to actually make since it's kind of done. It's like fully baked. But something like Ethereum, whether it's proof of stake or whether it's proof of work, you know, it's not a complete project. maybe it's 50% complete. I think Vitalik said somewhere between 50 and 60% recently complete.

Starting point is 00:19:25 So there are still future governance decisions to make. And whether that is like hash power, you know, kind of influencing some of those governance decisions or whether that's, you know, staked tokens influencing those governance decisions, is the difference that Ethereum and many of the other proof of stake chains are not ossified. They still have work to do versus something like Bitcoin and proof of work. Do you think that's a useful distinction in your mind? I think that is a useful distinction, but I would say even in an ossified proof of stake system,

Starting point is 00:19:55 it still wouldn't be basically a monitored premium in the same way that a proof of work system is. I think one analogy you can use is that a proof of work system is like non-volatile memory, right? Whereas proof of stake system is like volatile memory. Basically, you have to be continually online to be as trustless as possible with that system. And so that gives you different levels of hardness as it relates to attack surfaces. In addition, when you go down to the complexity of the code, proof of stake is far more complex, far more bloated compared to proof of work. And again, I'm not saying that proof of stake has no use cases.

Starting point is 00:20:28 So saying that something is a digital equity is not saying that it's worthless. It's just saying it's not a digital commodity. And so that's how I kind of would make that kind of differentiation that even if you had a hypothetical, ossified, totally done proof of stake system, or at least close to being done as possible, or maybe you're changing with gradual softworks and things like that, that you still inherently require more government because the failure modes in case that there is a major system event

Starting point is 00:20:53 requires more intervention than if you have a proof of work system. If you had, for example, something crazy like the internet goes down for a month, something like a proof of work system or a Bitcoin can just restart again. Whereas a proof of stake system requires kind of more of a manual restart

Starting point is 00:21:10 because it's not a system that's designed to make sense when it's not continually online. And so I think that there are multiple angles you can approach it from a hardest perspective, and it's more than just ossification, although ossification is a factor. Justin, I'm kind of interested in you responding to that, but I'm also interested in your concept of ether as an asset. Do you view ether as more commodity-like or more equity-like? Do you think that's a helpful distinction? I like to think in technical terms, and so these traditional labels I'm somewhat uncomfortable with, and I think the case could be made that

Starting point is 00:21:41 both BTC and EF have, you know, commodity properties and both have equity. properties. But, you know, I want to ask Lynn a kind of a simple question, which is you mentioned that the capital holders have this outsized power in the context of proof of stake. So if, let's say, Bitcoin was a proof of stake system, fully the same kind of ossification, the same kind of culture and everything like that, what exactly would be that outsized power? Because I'm not really seeing it. Well, essentially, you would go down to the idea that those that hold large stakes in the system have an influence, a structural influence on who can transact in that system, who can be censored and who cannot be.

Starting point is 00:22:24 And so, for example, in the current banking system, as we've seen in some countries lately, you know, there's a rather small number of entities that can then determine what people can use that system to transact and which people cannot. And so both types of systems have a risk where they can become, you know, centralized to the point where they have temporary or permanent blockades on certain types of transactions. And so in a proof of stake system, you have a situation where if you hold a quorum of the capital, if you hold a majority of the capital, you can then lock down the network to entities that are considered for whatever reason unworthy of transacting in that system.

Starting point is 00:23:02 And I think one thing keep in mind is when we talk about, say, attacks on a network, we often think of like, you know, some rogue actor coming in to attack the network, whereas I think a more realistic thing to approach is from a regulatory standpoint. So, for example, if a country declares that all of the proof of work minors have to, you know, avoid processing certain types of transactions, right? So that's an example of regulatory capture that becomes a problem if you have a lot of, say, publicly traded Bitcoin miners, for example, located in one country and that they have, you know, a majority of the processing power.

Starting point is 00:23:37 Now, that could eventually be rectified by bringing more hash to the network in other places. Whereas when you look at the proof of stake system, then the question, becomes looking at custodians and looking at whales and seeing how to what extent they can be regulated to essentially capture the network. And so that's how I'd phrase that. Right. So you somehow acknowledge and kind of highlight the outsized power that, you know, the stakeholders might have, but I think it's the miners, those who own hash rate have the exact same outsized power, right? It's just, and at the end of the day, both proof of work and proof of stake are proof of capital. And so one of the questions we should be asking ourselves is how much

Starting point is 00:24:18 capital is required to go overwhelm the system. That's one of the key questions around economic security. And it turns out empirically that proof of stake is vastly superior by roughly an order of magnitude 20x better from an economic efficiency standpoint to go raise that barrier to entry to actually perform a 51% attack. One thing that you said, which is that, you know, there could be these external attackers, but that could also be kind of endogenous attackers. And this is the exact same situation, in my opinion, for proof of work and proof of stake. Like you could take, for example, a company like Genesis mining.

Starting point is 00:24:55 They're effectively a custodian of hash rate. They have customers who will basically just send funds. That's all they do. They hold the miners and they can, you know, be regulated in the exact. same way that a custodian can be regulated. Now, the key critical difference goes back to the counter-attacks that the community can do. You mentioned that in proof of work, you can have more hash rate come in. Well, I don't think that's the expected outcome. And the reason is that if a 51% attacker comes in, they get to collect every single piece of reward, every single piece of

Starting point is 00:25:34 issuance, every transaction fee goes to them. And the reason is that, they can mine a chain where they are the only miner. They win every single block and no one else wins blocks. And so the honest miners, what are they going to do? They're going to turn off their miners because it doesn't make sense to be spending electricity and not get income. And then what's the next step? Well, they're going to want to liquidate their assets. They're going to want to sell their hardware. And then what can the attacker do? Well, now the attacker can buy this hardware for pennies on the dollar and basically reinforce themselves as the attacker. And it's kind of this really terrible situation.

Starting point is 00:26:12 And even if for some reason or another, the community, despite, you know, a totally compromised blockchain, despite the price of Bitcoin, maybe having crashed quite significantly, manages to make a counterattack, which is not against their rational interest because they would likely be losing money in that process, the counterattack would take months, if not years, to organize. On the other hand, in the context of proof of stake, you have a very straightforward mitigation, which is just take the attacker and remove them from the validator set. This is what we call kind of a forced exit.

Starting point is 00:26:49 Now, it turns out that in Ethereum, if you want to join as a validator, there is an activation queue. So it takes time to go from non-staked ether to staked ether. And if you want to double the amount of staked eph, it takes roughly two hundred, 200 days. So at a minimum, what you can do is you can kick out the attacker and that buys you 200 days. But of course, the community has more powers than that. One of the things they could do, for example, is totally destroy all the rewards that have been accrued so far in addition to doing the force ejection. Or they could do like something even much more nuclear is that they could just destroy the whole stake of the attacker. And if they do that, we're actually in a position

Starting point is 00:27:33 where we can bound the number of times that an attack could happen in the first place. Let's imagine, for example, that there's 10 million if that's honest and that's staking. If you want to do an attack, you're going to need another 10 million if. And every time you make an attack, you'll lose that 10 million leaf. Now, if there's only 120 million if in circulation, the attack can only be done 11 times. So really, in the case of healing these attacks, it's almost bled. black and white, the proof of stake is clearly superior than proof of work. So there's a bunch of points they respond to. So I'll try to go linearly, I guess.

Starting point is 00:28:12 The first point is that the difference between mining as basically the source of control versus staking as source of control is that staking requires little or no, you know, there's almost no entropy there. So once you hold the power, you accrue more power. Whereas in any mining business, including physical commodities and then now extending into digital commodities with, you know, mining of, say, Bitcoin or other blockchains, it's a very capital intensive business. You have to constantly put in fresh capital in order to maintain those rewards. And so it actually doesn't really accrue a lot of value for the miners other than on the margins, right? So basically scraping by and, you know, it's historically been a very

Starting point is 00:28:50 rough business to operate in. And so that's one difference between, say, the, that either way, you need capital in order to, you know, be a processor in the network. But one, One is kind of inherently more structural and inherently kind of, you know, power but gets power. And the other one is it actually kind of rewards new entrants. People that come in and say, okay, there's almost no economy of scale here. There's some degree of economy of scale. But for the most part, with proof of work, the most efficient energy sources are these small strand of energy sources around the world. Right.

Starting point is 00:29:21 So, you know, you can have these large entities that have, say, a big, you know, kind of economy of scale in terms of their ability to buy machines and things like that. But when it comes to the cost of energy, smaller entities actually sometimes have the advantage because they can go to places that are just too small for these bigger ones to deal with. The second one I think relates to overall when it comes to security, it's not just about 51% attacks. It's also about bugs, right? So for example, when it comes to the largest blockchains, I'm far less concerned that they're going to be 51% attacked than say the smaller ones that are sharing a hash hang algorithm with a larger chain, right? because they're much easier to, you know, like say, 1% of Bitcoin miners could attack Bitcoin and then go back to mining Bitcoin, right? So I'm more concerned about the smaller chains getting 51% attacked than I am the largest one or the largest five, let's say. And so in that

Starting point is 00:30:11 context, I'd be far more concerned about bugs. And so one of the things that's easy to grant is that in a world of just like where everything works perfectly, proof of stake has a higher cost to attack. That's something I mentioned in my article a couple times. where especially if a system's smaller, right? So especially if you're in a world with multiple chains and you're trying to create a project, proof of stake makes sense because it gives you a higher initial threshold to attack it. Whereas the downside of that system is that because proof of stake is inherently far more complex and there are greater attack services, there are greater bug services, it's more bloated code. There are more challenges to that system. And then this goes somewhat out of the

Starting point is 00:30:51 bounds of proof of work versus proof of stake, but then you layer in additional features. Right. So for talking about what makes a good money is something that is inherently simple and inherently small, no, decentralized proof of work. Basically, the leanest code you can get and distributed as among as many machines you can get and as immutable as you can get. Whereas as we layer things on top of it, like proof of stake adds a lot of code complexity. It also makes it, use my prior example, more like volatile memory, the non-violetal memory. It needs to be continuously live in order to function as intended. And so when you layer those things on top of it, I would say that takes a way a monetary premium, and then you can argue that it adds equity value, right? So, for example,

Starting point is 00:31:31 when we look at Apple stock, right, so we look at Apple stock over the long term, you know, like this kind of meme of ultrasound money for Ethereum, you have this thing where it's mostly focused on whether it's inflating or deflating and what percentage, right? So for example, Apple stock is actually one of the most deflationary assets around. It's got a 4.5% average annual deflation rate over the past 10 years. They decreased their share count for. from 26 million to 16 million. And that's, of course, one of the factors for why they did well on a per share basis. But at the end of the day, what it comes down to because they're in equity, it's the attractiveness

Starting point is 00:32:06 of their ecosystem for customers, right? So it's not about how many shares they have because you have other ones like IBM that are also rapidly reducing their share count. But because their ecosystems unhealthy, they're not really accruing that value to shares overall. And so I think when it comes down to kind of what is trying to be money, The thing that does almost nothing other than just be money is the best money. And something that tries to do multiple things, including proof of stake as one of the components,

Starting point is 00:32:35 inherently gives it less monetary premium. And then just to finish up with the very last point when it comes to recovering from 51% attacks. So I think the main point there, while granting that, say, in a non kind of bug world where things have to be approached honestly, proof of stake does theoretically have a higher cost to attack. But when it comes to unwinding that attack, the only way to do it is to soft fork and then take people's capital, which, you know, if you phrase it as you're taking the attacker's capital, that sounds fine. But if you realize that the attacker could be a regulated custodian and that you're taking people's capital that had nothing to do with the attack, right? So their coins were captured and then used against the network. You're basically then splitting participants, right?

Starting point is 00:33:19 So either way, responding to a 51% attack, a sustained 51% attack is a messy proposition. Well, I'm happy to go through response point by point, I guess. So one of the things that you've highlighted Lynn quite a bit is complexity and bugs. Now, I don't think complexity is necessarily like an evil. Complexity is one of the things that humanity thrives on, right? That we could be doing calculations on an apicus. we could be doing calculations on the calculator or we could be doing calculations on a computer

Starting point is 00:33:52 and humanity is very, very good at abstracting away complexity. Now, in terms of the complexity of proof of stake, it is more complex than proof of work, granted, at least 10x, maybe 100x. But it's complexity that at this point in time we have tamed. And one of the biggest maybe examples of this is that we have five different clients that have implemented the protocol.

Starting point is 00:34:19 And these are the small teams. We're talking on the order of five to ten people per team, and they've each managed to implement the consensus. Now, one of the strategies that you can take to mitigate against complexity and bugs is to have client diversity. And this is one of the big reasons why we have five clients, is that we can enable the community

Starting point is 00:34:40 to basically buy insurance against these bad bugs. Another point that you've brought up is the idea of being continuously online, which is basically the technical word for that is weak subjectivity. And the idea of weak subjectivity is that if you've been offline, the way that you sync up is that step number one, you get some sort of semi-trusted checkpoint, and then you sink from that checkpoint onwards. Now, it turns out that Bitcoin has these checkpoints all over the place.

Starting point is 00:35:12 Now, here's one example. Like literally, in the Bitcoin, core software in the C++ code, there's like 12 checkpoints. And so if hypothetically there was an attacker that would build from Genesis, build an alternative chain that completely rewrite history, then guess what? This chain would not be valid. Why? Because the developers have literally put subjective checkpoints in the codebase. Where's another place where there are subjective checkpoints? Well, if you've been offline, you need to go. download the software, the Bitcoin core software, that's like step zero, right, before syncing.

Starting point is 00:35:51 And guess what? When you're downloading the software, you're trusting the code. You're trusting the whole supply chain. You might be trusting, you know, GitHub is giving you the right code. You might be trusting even your operating system. There's all sorts of places where you're effectively trusting the initial checkpoint. Also baked into the software is this idea of bootnotes, right? the first time you sync after being offline, you need to connect to the peer-to-peer network, right? And so what happens in practice is that literally in the code or some hard-coded IP addresses,

Starting point is 00:36:23 and now you go talk to these IP addresses. Now, guess what? If all these IP addresses are compromised, you're going to be disconnected from the real peer-to-peer network. You're going to be in this isolated kind of fantasy island, and you're going to be downloading and syncing the wrong chain. And furthermore, I think that the Bitcoin is thinking, that, hey, we'll always, you know, sink from Genesis, even if there were not all these issues

Starting point is 00:36:47 that I mentioned, is kind of fantasy. Like, just imagine hypothetically that there was a reorg of a hundred days, right? The last hundred days was just completely wiped out. Do you really think that the Bitcoin community would just say, okay, yeah, we're just going to accept that. That's totally normal. We're just going to pick the longest chain, even though it's wiped out a hundred days of history. No, of course not. What will happen is that there would be social governance, would effectively create a new subjective checkpoint and then basically pin the chain that was attacked and say this is the canonical one,

Starting point is 00:37:22 despite not being the longest. One of the other points that you brought up was around the last mover, right? If you're the last person to come in as a miner, you have an advantage. And I would argue this is actually a huge disadvantage for Bitcoin. So in proof of stake, you have perfect fairness. You put in one unit of capital

Starting point is 00:37:42 and you get the exact same amount of rewards, no matter how big, no matter how small. In proof of work, you have various places where the last mover or the big fish have these unfair advantages. So you mentioned economies of scale. If you're a retail miner buying one bit main mining rig, you're going to get absolutely screwed on the price. You're going to be overpaying by 2x, 3x, 4x, 5x, your hardware relative to the professional miners that are buying in bulk. you know, $100 million at the time. Another thing that you mentioned is that, you know, because of Moore's law, you have a last mover advantage.

Starting point is 00:38:21 And so guess what? That means that attackers who want to attack, they have an advantage over the rest of the network. And not only do they have an advantage because they can pick the latest and most bleeding edge hardware, but they actually, for them to perform an attack, the price of electricity is, to a large extent, irrelevant. And the reason is that in order to perform a 51% attack, it suffices to run it for, let's say, one day or one week and then discourage all the honest miners to just turn everything off. So 99% of the cost of making an attack is in the rigs and in the transformers and all the electrical infrastructure to run the rigs.

Starting point is 00:39:03 It's not in the actual operation of the miners and the electricity costs associated. And so what that means is that as a miner, you can actually go acquire hardware, which is literally in the dump. So you have professional miners. They need the price of electricity to be, let's say, under 10 cents. Now, if the price of electricity for them is over 10 cents, then they would, let's say, get rid of that hardware. It's no longer valuable for them, but it is valuable for an attacker. And so basically the fact that proof of work is inherently unfair, is inherently unnecessary, unequal actually creates advantages for an attacker. And then one of the things that you mentioned as well

Starting point is 00:39:44 is around slashing custodians, right? One of the tools that the community have in the context of proof of stake is that they can slash. And slashing a custodian is kind of problematic because you're not really penalizing the custodian, you're penalizing the clients behind the custodians. And this is why I wanted to emphasize the fact that there's softer tools than slashing. One of the tools that you can do is this forced ejection. There's no penalty there. You're just removing them from being consensus participants, and that will buy you some amount of time.

Starting point is 00:40:17 In Ethereum, it's 200 days, but that's a parameter. You could make that 1,000 days. Or what you could do as well is you could actually freeze the funds. You force eject, and then you freeze the funds for five years. You know, that will teach them. Or you could do partial slashing. You could say, you know, we'll give you a slap on the wrist this time. We'll slash only 10%.

Starting point is 00:40:36 But if you try under attack, again will slash 100%. And so there's this wide range of tools that the community has to address these more delicate situations. But again, this is a tool set that is completely unavailable in the context of proof of work. So I refraise the one part of the middle where you describe proof of work as being inherently unfair. I would describe that as inherently renewative, basically that every dollar that goes into the space has a set of decisions with it. You're determining what hardware you're going to buy, what scale you're going to buy it, what stranded energy source or what cheap energy source you're going to use. And a series of decisions goes into determining, you know, your success as a

Starting point is 00:41:18 minor. And then rather than, you know, say early participants, they're then having a permanent advantage, right? So for example, in, say, a pre-mined system, proof of stake system, those who bought in at the early stage, you can say, okay, they made one good decision, but then they have this permanent structural advantage for the rest of time as long as they continue to hold their stake. Whereas proof of work requires an ongoing series of good decisions in order to maintain your ability to be our participant in the network. And I think actually when we look out longer term, the kind of the direction that we're going, I think in proof of work, assuming these systems continue to be around for quite a while,

Starting point is 00:41:54 is that you'll see increasing integration between miners and the energy producers themselves. We already see, for example, early signs of co-location where you have an energy producer, could be solar, could be hydro, could be whatever. And they have Bitcoin miners on site. They often will contract with a miner to co-locate them, but they could easily do it in a vertically integrated model where the way that the grid works, and this is something that a lot of kind of environmental criticisms of proof of work don't understand, is that the electrical grid naturally has to overproduce electricity, right? Otherwise, if we didn't have extra productive capacity, then turning on the marginal laptop would cause a brownout, right? So we have to

Starting point is 00:42:33 have this spare production always going into the network, and then we have to have a way to drain out excess power that's being produced but not consumed. And it's actually this really kind of tricky balancing act. And so proof of work systems are actually a really good load balancer, where if you're, you know, the type of energy source that doesn't have full control over your production, maybe you're a wind farm, maybe you're a hydro dam, maybe you're solar, or maybe your nuclear plant that just kind of has like continuous power, but maybe the demand is fluctuating throughout the day, right? So more demand at evening or less demand other times. And so I think over time, we're going to see that the cheapest source of electricity is that virtually zero cost,

Starting point is 00:43:14 stranded energy. And the best ones to harness that are the producers or people that contract directly with the producers and go on site. And so I think over time, that's what basically makes it as kind of diversified as possible. And right now, I think, you know, last I checked, the biggest Bitcoin mining facility in the world is like 1% of total hash rate. It's already kind of a structurally decentralized system. And I think it only gets more so as you increasingly incorporate that into production. And so, you know, I agree that, say, basically proof of stake systems have multiple ways to deter attackers. They require governance. And at worst case, they require compensation. Whereas in, say, a proof of work system, you also have a couple ways to recover.

Starting point is 00:43:56 The simplest way is that you know changes and more capacity, I should say, more hash capacity can come online. And if there's an existing attacker, then those new entrants have an advantage over that existing attacker. And, you know, people can fund that in multiple ways, right? So, for example, if you're a large Bitcoin holder and Bitcoin is currently being 51% attacked, you now have an incentive to bring hash online. It might not be profitable at first. You're basically making an investment to unlock your Bitcoin. transactions. Number two is that the nuclear option in, say, a proof of work system would be to do a

Starting point is 00:44:32 soft fork to kill the miners. You could phase that in over time. There's a way to do it gradually. And so there are those nuclear options if they end up being needed, but the kind of the beauty of the system that it's self-regenerative. So one of the things that I'll say on the fairness is that in order to be a profitable miner, you need to operate that scale. Like you can't just be a retail minor with one rig. That does just doesn't work. And there's like decentralization for. Like you have miners, for example, building their own custom firmware. They have their own specialized know-how. They know how to take the mining rigs that they receive and just assemble them as quickly as

Starting point is 00:45:07 possible so that they can be immediately connected. And then there's all sorts of centralization vectors around the supply chain. What if the fab, what if TSM or Global Foundries was to create their own rigs? Well, actually, we've seen that. Intel, right, one of the big fabs, they're building their own chips. what if you just cut the middleman? And that is a huge centralization vector. And in practice, I don't know anyone.

Starting point is 00:45:34 And, you know, I've been in this space for almost a decade. I don't know any individual who mines Bitcoin at this point in time. It's all industrial. On the other hand, with proof of stake, I think everyone on this call, you know, maybe except you, Lynn Alden, literally mine staking as individuals. We're all contributing. The diversity on proof of stake is much, much, much larger. The barrier to entry is much, much, much lower.

Starting point is 00:45:59 You basically just need to have a computer running 24-7, and that's about it. And the fairness is just out of the box. What happens with Bitcoin mining is that you have two classes of people. You have the retail who are going to get absolutely wrecked in terms of returns. And what's going to happen is that they might not even realize that they're getting wrecked. And the reason is that, you know, the price of Bitcoin went so high that, you know, in dollar terms, they're actually profitable. But in Bitcoin terms, you know, they put in 10 Bitcoins in initial investment and they got three Bitcoins back. Whereas on the other hand, if you're super sophisticated industrial miner, you know, you can go, you know, sell hash rate futures.

Starting point is 00:46:40 You can go buy, you know, energy futures. You're like really well connected to the fabs. You might even make your own chip. You know, making a chip is like at least $10 million. dollars. You know, if we're talking three nanometer chip, you know, you might be minimum investment is $30 million. The barrier to entry is much, much, much higher to be competitive, like empirically, like what can be observed today. And then you talked about, you know, the two remediation that the community can do. One is kind of the do nothing approach. And as I mentioned, I don't

Starting point is 00:47:10 think the do nothing approach really works out because, you know, the price of Bitcoin will crash. it will be difficult for honest miners to be profitable because now they have to make a huge, like, guess, not only is the current hardware need to be turned off and they make no income, but, you know, now we're talking about amplifying the risk. They need to go double the amount of hardware that they have. And now they're basically doubling the risk. It just seems completely crazy when you have no income to just grow your capital by so much. And in terms of the nuclear option, well, that's not satisfactory either because you're just effectively

Starting point is 00:47:46 starting from scratch, your old shout to 56, that's completely compromised. And now you're starting with some new algorithm. But here you can have an attacker just buy out in terms of capital, you know, $5 billion or whatever it is, $10 billion of that other thing and completely overwhelmed that new form of proof of work. So I'll try to keep my response short just so we don't keep going super back and forth on

Starting point is 00:48:11 these without kind of guidance. But one thing I'll point out, so it is true that there's supply chain risks with proof of work. And that's something that participants have been familiar with quite a while. And it's also you have jurisdictional risk, right? So, for example, you know, when China banned their mining, a lot of people were like, oh, like, that's bad for Bitcoin. It was actually a lot of Bitcoiners are like, oh, thank God. Like now we won't have like 60% of the hash rate in China, whatever the number is. We actually want to see that geographically dispersed as much as possible. And, you know, a lot of them welcome the entrance of new participants in terms of making the hardware

Starting point is 00:48:46 because you don't want that to be super concentrated either because you can either consolidate power, you can put in secret back doors. There are risks associated with the supply chain, kind of like how there are risks with hardware wallets associated with the supply chain. So there are those real risk with proof of work. And so it's not the argument that any system is perfect in every single metric. It's how it responds overall. You know, what are the tradeoffs that it's making?

Starting point is 00:49:08 And, you know, I think the last part I would just jump on is right now, for example, Well, there are a large number of very, very small private Bitcoin mining companies. They're very small firms. Now, they're still larger than the individual, right? But they're, you know, small compared to those publicly traded companies because you kind of have two different classes, right? So you have some companies that are going after, you know, just economy scale. They're just building a massive facility and then they're buying a lot of energy and then

Starting point is 00:49:36 they're operating that way. And they're actually still tiny in terms of, say, global companies, right? So they're not these mega companies because mining is. inherently not that lucrative, but they're going for the economy of scale approach. Then you have the other type that is basically buying older machines, and then they're going off-grid for the cheaper source of energy, right? So they're going, for example, when you find an oil well and it has a little bit of natural gas with it, but it's not enough to build a pipeline for, they just burn the natural gas. There's nothing else they can do with it. So these companies

Starting point is 00:50:07 go in and say, hey, instead of just burning that natural gas, how about we just put this little box of Bitcoin miners and you can use it to generate electricity and mine it there. And only small companies can really do that. It's something that small teams have to go out and make deals with these companies and kind of arbitrage. And so there's not just one model of how a Bitcoin miner works. So I would phrase it like that. But overall, I think the key thing to focus on is one versus like normal attacks versus bugs and other things like that. And you touched on that with the client diversification where there's different clients. But, you know, one thing worth pointing out is, like, at least I don't have the numbers in

Starting point is 00:50:44 front of me, but last I checked, the biggest client is, like, what, like 84% of Ethereum clients. So you do have some degree of client diversification, but it's also partial illusion. And these things over time tend towards basically becoming protocols, where once one becomes dominant, it's pretty hard to then have true diversification in there. But I agree that in theory, client diversification is a good thing and helps protect against bugs. But, you know, you. You know, it's a lot. You In practice, I think one of the key things that protects against bugs is having the simplest possible code base. So complexity can allow us to do a lot of things.

Starting point is 00:51:19 And, you know, in a system where you want it to do a lot of things, if you're not trying to be the best possible money, if you're trying to be an operating system that you do multiple different things, then complexity is a useful thing. And that's why I don't, for example, say that proof of stake system shouldn't exist or that smart contract blockchain shouldn't exist. It's whether or not they're capable or if they're suiting. to acquiring a monetary premium over the long term. And that's, I think, the key thing to focus on.

Starting point is 00:51:45 So on the topic of very quick response. On the topic of client diversity, we actually have two types of clients, and they're very, very different. We have the execution clients, that's basically GEF, which is effectively to, you know, at first approximation is effectively a monopoly. Let's say 100% use GEF. And then we have the consensus layer where we have five different clients. Now, we can ask ourselves, what is the value of client diversity?

Starting point is 00:52:13 Like, one of the value is to be insurance against bugs. But guess what? Geff has been battle tested for years and years and years, you know, with hundreds of billions of dollars that it's securing. And guess what? There's not that many bugs left in Geff. On the other hand, when you look at the consensus layer, which is much, much fresher, the value of client diversity in these early days is much, much higher.

Starting point is 00:52:38 And right now, we do have. have a client diversity problem, you know, with Prism having roughly 65%. But some of the bigger stakers, you know, have signaled that, you know, they understand the value of diversity. And I'm very optimistic that this is going to improve in the months to come leading to the merge. Another thing that I want to highlight is that if we want to be the internet of money, we need to have a timescale on the order of the internet itself, right? The internet is here to live on for decades, if not centuries. And it just so happens that complexity is something that has a half-life of, I don't know, maybe like one year, right? Like, it can be tamed.

Starting point is 00:53:20 It's something that can be hardened. We have this idea of the Lindy effect, right, where over time, as lots of, lots of values being secured by these systems, they can be trusted. And maybe different people have, you know, different risk tolerance. But if you look over the long term, if you look at fundamentals, this is noise, right? The complexity of a system is absolute noise. The bugs will be fixed. The system will harden. And really what we should be looking at is like these long-term fundamentals. And when we project ourselves to long-term fundamentals, we bring up topics like quantum, right? It turns out that the nature of computing is going to change in the next 20, 30 years. And it so happens that proof of work is going to be completely disrupted by quantum. And so,

Starting point is 00:54:07 So yes, there are these short-term things, which in the grand scheme of things are just noise, but if you zoom out and you really focus on the fundamentals, then actually you can see that there's fundamental reasons to be bearish on proof of work. The layer two era is upon us. Ethereum's layer-to ecosystem is growing every day, and we need L2 bridges to be fast and efficient in order to live a layer-two life. A cross-is is the fastest and cheapest and most secure cross-chain bridge. With a cross, you don't have to worry about the long-weight time.

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Starting point is 00:56:57 And something I've noticed out of the Bitcoin or camp is they tend to be focused on commodities and just the commodity properties of Bitcoin and how it kind of relates to. the money. And you've described Bitcoin as something akin to commodity money as related to how it consumes energy, viewing energy as a commodity, and how that energy is one of the things that, you know, produces Bitcoins via proof of work. And in my mind, this I think is partly a, maybe described as like a moral argument as in I think Bitcoiners kind of think commodity money is just a better suited money to the world based on just its equitableness and fairness. Would you agree with that description of the general belief from Bitcoiners. And if you agree, why you think commodity money is just a better property for money to

Starting point is 00:57:43 have? So I think that, I mean, there would be different arguments among them. And so if we, I mean, if we look at back in history, right? So I do approach this mostly from a macro perspective, right? So, for example, if you're talking about, say, different types of proof of state competing with each other, which one's going to win, you know, I would let the PhDs of computer science work that out. When it comes to a kind of a macro analyst looking at different blockchains and

Starting point is 00:58:04 determining which one has a monetary premium. have a monetary premium or is secure enough to invest large amounts of capital in, I approached it from that macro perspective with some degree of obviously technical details along the way as needed to inform that macro perspective. And if you look back in history, you know, essentially what you're giving up, if you go from commodity money to stake money, is that it goes basically towards governance, right? So for example, in say the period prior to the early 1900s, you had commodity money for the most part. And you had layers of stake on top of it. But the underlying foundation was commodity money, proof of work in the form of gold. And then as you shifted towards

Starting point is 00:58:42 purely Fiat money, you essentially shifted more towards proof of stake. And, you know, as an example of how the Federal Reserve works, right? So, you know, the cost of producing money has no constraint on how much money you can produce. So you have to, you have to add artificial constraints to how that's going to function and how transactions can be processed, who can make new, you know, for lack of a better word, tokens, new units of the system, and who gets to participate in the network. And, and that's And so, for example, most central banks are not really decentralized at all. The Federal Reserve is, you know, the most decentralized. And it's basically like a proof of stake system, but not on a blockchain, right?

Starting point is 00:59:16 So you have the system where you have 12 regional reserve banks. Each one has, you know, they're owned by commercial banks, right? So they have this kind of special share structure. So they have their representation in that system. And it's based on their capital, their initial capital, their stake in the system. Then you have the Federal Reserve Board, which is appointed by the president, confirmed by the Senate, So that theoretically goes downstream to the people because you vote for the politicians and then they appoint and confirm those participants. And so when you look at the federal open market committee, you're in that system where you have the seven reserve board governors, the ones that were appointed by the government.

Starting point is 00:59:51 And then you have this rotating member of five of the 12 presidents of those banks, right? So you have this kind of hodgepodge mix of federally appointed and bank appointed officials determining what the policy is going to be for that network. And that's, you know, generally over time, that tends towards centralization because as debt builds up and as the system starts to break down, they increasingly get captured by the government system because they have to monetize debts and they have to basically bail out the system and provide liquidity when no one else is providing liquidity. And so basically with the invention of Bitcoin, you have kind of the reintroduction of commodity money. And it kind of allows that system to potentially reset over the long term and allow people to opt into a different. system. And so those systems can continue to exist side by side. I expect that they will for a very long period of time where you have that more existing stake system. And then you have introduction of basically, you know, kind of a flack of a better word digital gold. And then of course, with that,

Starting point is 01:00:51 you know, as people innovate, they come along and say, hey, we can also, if we have digitally native commodities, we can also come along and have essentially digital native equities. And so we're still kind of exploring the total adjustable market of what all these things are going to be. And what their different use cases are going to be for. And I think the one thing I would just point out is that the more that any given system tries to do, usually, not necessarily all the time, but usually, the worst it's going to be at any one of those things. And so one example is that as, say, Ethereum has tried to somewhat hard as monetary policy, it's also, you know, arguably lost market share in defy. So, for example, you know, in late 2020, Ethereum had something like 97% of total value locked market share. As we speak now, it's down to 55%.

Starting point is 01:01:39 So you have all these different basically ecosystems than competing on fees, on usability, on network effects, things like that. So you have kind of, you know, Ethereum obviously has the largest network effect, the most lindy of all of them. Then you have these other ones coming in, often with increased complexity, often already proof of stake from the beginning. and they're doing their own thing. And we're seeing this kind of diversification over time. Whereas so far, Bitcoin doesn't really have competition from other systems. You know, we had these kind of brief periods of competition. You have like a meme of Doge for a period of time.

Starting point is 01:02:12 You have temporarily Bitcoin Cash is relevant and these fade over time. And so you have these kind of two different worlds. And so I think one of them is based more on governance and making your ecosystem as attractive as possible. And the other one comes down to which one is the hardest. and essentially what is the one that is basically the best at being money? I definitely want to throw that to Justin, but just a quick follow-up, Lynn, I think baked into that argument is kind of, or maybe I'm just pulling this again from other

Starting point is 01:02:38 bitcoins who make similar arguments, is that the nature of how kind of like proof of stake represents the fiat system and proof of work represents like the commodity money like gold on which the proof of stake system rests on top of. I think is some sort of like a subjective argument about people. of the world will like this system more, that like the proof of work system more because it feels more fair. How much of this do you think is actually like a technical objective argument of this is objectively a better system? Or how much do you think this is a subjective argument of people think that this system is more equitable and more fair to them? So therefore, they're going to choose this new

Starting point is 01:03:18 proof of work commodity money system. So I think, I mean, it's a good question, right? So I think you would get different answers depending on which person you talk to. I think that there are some that would the kind of the fairness argument. I personally approach it more from a technical risk perspective. And so I view what is the system that is less likely to have tail risks? What is the system that is optimized for what is trying to do? And, you know, kind of the whole like, you know, Ethereum Maxi versus Bitcoin versus multi-coin, all that debate, you know, I approach this as someone who I own dozens of different stocks. I mean, I'm happy with diversification. I'm happy with going out to different systems and going out to distribute my.

Starting point is 01:03:56 capital in a diversified way. And the only challenge is that in this particular ecosystem, it's inherently very speculative, right? So we're still in some ways early stage in many of these things. And so you basically have one that looks the most Lindy, 13 years of operating history, very simple, proof of work. And then you have a large number of kind of VC type of investments and they're rapidly innovating and competing on capturing that market share. And so, you know, when it comes to the fairness argument, I think partially that that gets mixed up in a bunch of different things. So one is the proof of work and one is like the scarcity of the tokens, right? So basically in the current system as designed now, the argument is the contillin

Starting point is 01:04:36 effect. So the closer you are to the money printer, for lack of a better word, the more advantage you are. And a tangible example of that is, say, during COVID, corporations, large corporations that are able to issue public equity debt. I mean, public debt. So public securities able to issue debt, they had no problem getting finance. Whereas if you were a small business, relying on bank loans and things like that, you were far less able to get access to that liquidity when you needed it the most. And then the Fed came in and exacerbated it because even when the corporate sector kind of frees up, that's when they said, okay, we're going to start buying corporate bonds to help liquefy that system. And you didn't get to reliquify the lending market until later, right?

Starting point is 01:05:17 So you had kind of these, you know, restaurant, you know, small restaurant would close, whereas large restaurant chains, for example, had better access to capital. And so that's an example. of how the kind of current system is kind of designed to, you know, advantage those who have that scale or that direct access to public markets. And I think I would separate that from, you know, the idea of proof of work versus proof of stake in the technical sense. Justin, you want to respond? I like to look at things from a technical perspective. And so these labels equity and commodity, you know, I'm trying to define them and understand what they mean.

Starting point is 01:05:50 Like for me, you know, equity, there's kind of two aspects to it. one is that you're kind of financially exposed to some sort of upside for some sort of project. And I think all blockchains have this. Any blockchain with a token, including Bitcoin, including Ethereum, are, you know, exposed financially to some sort of upside, you know, in terms of adoption, in terms of the block space being more valuable, in terms of the token being used as a store value as the money, et cetera, et cetera. And then there's the other aspect of the equity definition is the voting aspect.

Starting point is 01:06:20 And I would argue that there's no distinction there either, you know, both BTC tokens and EVE tokens are non-voting equity tokens. And so, you know, this goes back to the second kind of label that you're talking about, which is commodity. And I think really what you mean by commodity is the non-voting aspect. Well, guess what? They're both commodities in that sense. They're both non-voting.

Starting point is 01:06:42 And, you know, we've been talking about, you know, consensus participants, you know, exercising some form of governance, you know, by basically doing 51% attacks. that is kind of the extreme scenario, but like in the default situation, it has nothing to do with a company, with a board of directors and the CEO and all of these things. By default, the governance is exactly the same for Bitcoin and Ethereum, which is namely governance by rough consensus off-chain through the community. Right. This is how Taproot went through. This is how Segwit went through. There's lots of debate, lots of discussion, very chaotic and organic. and then ultimately the way that these, you know, these governance decisions are enacted is through

Starting point is 01:07:26 users, you know, installing software and, and agreeing that this is the canonical piece of software. The, whereas on the other hand, if you look at the other companies, it's completely, that's just not the case. By default, you've enshrined governance powers that are just exercised on a day-to-day basis. whereas with consensus participants, there is no day-to-day exercise of governance powers unless maybe you're in this kind of special type of blockchain like Tesos, polka dot or DFINITY, where you have on-chain token voting.

Starting point is 01:08:01 Now, one of the things I think David said is around like the objectivity of labeling things. You know, I think memes play a huge role here when we want to look at monetary premium. And it's kind of interesting because proof of work and proof of stake, from a meme perspective, are almost the exact opposite. Now, let me elaborate. With proof of stake, you have what I call a scarcity engine. Proof of stake is a mechanism to turn liquid eif into this frozen eph, which is used as collateral. Right now, we have roughly 10.5 million eph, which is staked.

Starting point is 01:08:41 But my projections basically say that we're going to have roughly half of the whole supply of eph, being staked eventually. So on the one hand, we have this scarcity engine. For proof of work, it's the exact opposite in the sense that issuance and transaction fees, which is basically the income that miners have, to a very large extent, needs to be sold to cover for expenses, to cover for electricity, to cover for the hardware. And so basically what you've created here is a liquidity engine, where you're adding liquidity to the market by being a forcing function to sell this issuance and to sell these transaction

Starting point is 01:09:20 fees. You know, if you were to ask yourself, which is the best system to create money for the internet? Is it the one that's like constantly market dumping or is it the one that's encouraging people to hold their token? I think it's pretty obvious which one is more valuable from a meme perspective to push forward this idea of being the money for the internet. I want to get Lynn back on kind of that last comment, her reply on sort of the meme aspect of this money. And I think you were talking about like deflationary supply, maybe Justin, or just kind of, you know, lower supply and greater issuance in a proof of work system. But it strikes me that the distinction that you're making, as I'm going through this,

Starting point is 01:09:58 is it seems to be the case, Lynn, that you're saying, you know, proof of stake is the thing that really moves the asset from a commodity to an equity generally. And you're taking like historical reasons for why that's the case. And I think, Justin, you are saying it's not proof of stake. It's actually governance control that moves the thing closer to an equity versus a commodity. And if that's the case, I want to get, you know, your thoughts on that, Lynn. So if Justin indeed is saying that it's more about governance control and less about proof of stake as a consensus model, would you agree with that? Because I think, and I want to think maybe clarify this, Justin, that I don't think you are saying all proof of stake systems.

Starting point is 01:10:42 are more commodity-like than equity-like. You were saying like Tezos, another, you know, systems that retain governance control at the token layer are maybe more equity-like using Lin's definition. But let's get Lin's thoughts on that first. Do you think this maybe hinges upon governance control rather than maybe proof of stake versus proof of work? I think proof of work versus proof of stake is one aspect of governance control. And so, you know, as we touched on earlier, there are multiple different models.

Starting point is 01:11:11 But at the minimum, what a proof of stake system gives is that the more of the units that you hold, the more say you have over what transactions are valid. You don't get to necessarily change the other rules of the system, but you get to say what transactions are processed, which ones are censored, and so forth. So there's that. The other aspect is really who gets to change the protocol and how and when. And so, for example, and that's the part that goes outside of the proof of work versus proof of stake debate because you can have proof of work. systems that then start to look more equity-like. An example would be, you know, he mentioned the Segwit and Taproot updates. Both of those were opt-in. So they were soft-works, meaning that, you know, and I think this also ties into the meme idea. So what makes a better marketing message essentially.

Starting point is 01:11:56 So obviously, Bitcoin and Ethereum and other systems come at it from, you know, different, you know, marketing perspectives where kind of the meme of Bitcoin is self-sovereignty. So you run your own node. Nodes are small. You know, it doesn't take a lot of resources to run a node. even 10 years from now, it shouldn't take a lot of resources to run a full node and have the whole blockchain, and that any updates that occur, you can choose to opt into or you can retain your existing node. And of course, the smaller it is, the more auditable it is, the less trust there is. There is always some degree of trust unless you go line by line about how that system works, but the smaller and more compact you make it. And by making all updates opt in,

Starting point is 01:12:35 you basically maximize to the extent possible that self-sovereignty. Whereas if you, for example, difficulty bombs, you then say, okay, so, you know, it doesn't really matter what you think because the developers are going in a certain direction and you don't really get to opt in. Your existing, what you have there is going to die if you just leave it like that. And that becomes a matter of marketing. So Ethereum says, okay, well, that's a tradeoff we're willing to make for now, but we're going to focus on the fact that our system's changing, that our system has, say, a longer term time frame.

Starting point is 01:13:05 We want to, you know, we're less focus on ossification now. we're focused more on changing on kind of having a system we want in the future. And so there are obviously different marketing messages for different systems. And then you have some of the, you know, the quote unquote Ethereum killers or competitors come in and their marketing message is, hey, Ethereum is super expensive to use. It doesn't scale well. And, you know, it's mostly for the rich whales to play around in. We want to have low transaction fee. So, you know, there's different marketing messages for different systems. I would separate that from a meme in the sense that, you know, I think memes are useful for marketing ideas.

Starting point is 01:13:41 That's obviously that the whole point is they spread very quickly. You can contain quite a bit of information in an analogy or a picture with a couple words on it that people already know what the picture is from. That's a way of spreading information, but it needs substance behind it. So something is only memes. If it's like Dogecoin, which is built on memes, the staying power is not going to be great. Whereas it's something isn't, you know, the technology is there is doing what is advertising that it's doing. then it becomes, you know, marketing can spread the message faster than others. But the underlying foundation is still there for it to have staying power.

Starting point is 01:14:14 Justin, I'll let you respond to that. But Lynn, at the beginning of your statements, you were talking about how the unit is the thing that gets to say the transactions are valid. Like ether, the unit is the thing that approves or declines transactions. And that is governance in of itself because it's baked into the asset itself. One of the mental models that we talk about in the Ethereum land is like Ether is like this virtual ACER. right it takes the properties of the asic and it imbues it into the asset itself and i think what you're saying is that that represents some sort of governance but then doesn't that by that same rule also apply governance to the physical asics and what does the separation of the asic from btc how does

Starting point is 01:14:55 that meaningfully change governance and doesn't that just mean that the mining facilities then just have the same governance powers that you alluded to eith token holders having so historically one of the big challenges of, say, wealth concentration is that wealth begets more wealth, because as you get more wealth, you can influence, say, laws to further support your wealth, and you can basically just have that virtuous cycle of more and more wealth. And so one of the difference between a proof of stake system and a proof of work system is a proof of stake system if you acquire stake in the system, and then that inherently provides income from itself, you essentially acquired a permanent stake in the system for as choose as you

Starting point is 01:15:35 want to hold it with no ongoing input cost to retain your control of the system. It kind of over time inherently collects. It inherently consolidates into more and more, you know, fewer owners holding larger and larger shares of it. Whereas in a proof of work system, you're essentially renting your ability to govern the system. Again, only with transaction ordering, right? So you're putting in capital and you're buying machines that will degrade.

Starting point is 01:16:01 Your energy source could over time become less efficient. So your facilities that you set up, the energy sources that you're arbitraging could change, could dry up, could become less efficient, and the hardware itself becomes less cutting edge over time. And so your decision to actively maintain your control of that network, or at least the control of the transaction ordering, is required on continually recycling your capital into the system. So it's a constant series of decisions rather than kind of the system that inherently benefits people that bought in first and then hold it forever. And so in something like a proof of work system, you know, obviously the early token buyers get more money, right? So if you buy early and hoddle it, that's great for price appreciation. And you can, over time, influence price by buying more. But you can, you know, no matter how much, say, Bitcoin Michael Say, Michael Sayler has, he has zero control over what transactions are going to be processed.

Starting point is 01:16:55 But that's, again, only one aspect of it. So even though this particular debate is a proof of work versus proof of stake rather than Bitcoin versus Ethereum or. you know, simple money versus smart contract money, whatever the case may be. But it's kind of one piece, I think, of the puzzle, which is if you're going to have something that's commodity like, what you have is some degree of immutability. You're never going to have as much immutability in the digital realm as in the atomic realm, right? So just atoms of gold or atoms of copper. But if you're going to approximate as much as possible, what you're designing is a system that is,

Starting point is 01:17:28 you know, very decentralized, very hard to force changes on. and that, you know, if anything, there are either no changes or there are opt-in changes. Whereas anything that deviates from that model and requires either ongoing, kind of forced buy-in from, say, a small team of developers or kind of small development hubs, right? So most of the proof-of-stake systems have these foundations or these kind of companies associated with it, that this kind of named, this name the same thing as the tokens named. So you have these hubs, you know, they could be one hub. There could be two or three hubs depending on the protocol. and those are kind of inherently more equity-like, even if they're proof of work. So even if they are proof of work but difficulty bombs or proof of work but super large blocks

Starting point is 01:18:09 so that people can't run their own node, there are multiple kind of ways you can then shift into looking more like an equity system, meaning that there are quote-unquote managers of that system rather than an unmanaged, mostly unmanaged system. I want to just unpack that and define that again just for the listeners and summarize. What you said is that, you know, because the ASIC is, separated from the unit, it requires, in order to have similar levels of power over the system, it requires further investment, in addition, always, always more and more and more investment into the future, which bears risk. And I think a lot of Bitcoiners really like that risk

Starting point is 01:18:47 aspect when it comes to investing in proof of work facilities because it doesn't guarantee you anything. And I think that's a property of Bitcoin proof of work that I think Bitcoiners really, really enjoy. But I just want to ask. the question, doesn't that argument rely on the fact that returns on capital are less significant in proof of work than they are in proof of stake? Well, I think so historically with commodity monies, the producers rarely have much control. So there are commodities, for example, that are very, very low stock to flow ratios like, say, oil, where producers can get together and have a lot of control over the system, whereas

Starting point is 01:19:24 something like gold, where most of the gold is already out there. so gold miners have virtually no control over the system. And that so far has been true in the Bitcoin ecosystem where, you know, the power is not really residing in the miners. And we've seen that, for example, with the whole kind of block size wars where there's a period of time where the, you know, the majority of miners were favoring the block increase. And they still couldn't get that through on that network. You had kind of the node rejection.

Starting point is 01:19:51 And so I think part of what maintains a decentralized system is that combination of kind a division of powers where you have the super small node where you can just run a node and you become all the memes self-sovereign all that then separately from that you have the mining and so you can rent you can put capital and risk the ability to potentially give you a temporary period where you get to essentially vote in terms of what transactions are going to go through but it doesn't give you any sort of permanent allocation compared to you know just holding tokens and then that gives you a long-term you know kind of permanent ability to order all future transactions forever. Justin, you want to respond? Sure. So one of the points that was brought up is this idea of

Starting point is 01:20:32 the rich gets richer in the context of proof of stake. Now, I see this as kind of not completely the truth. The way I see it is wealth preservation. The rich stay as rich as they were. And the reason is that when you're staking, you have to pay for something. And namely what you're paying for is opportunity cost. And it turns out that in an open market, you know, the APR is just going to tend towards the opportunity cost. You might be paying 3% opportunity cost by placing your EF in this black box and you can't touch it. You can't do defy and all this good stuff. So that's what you're paying and then you're getting compensated. And so net, you're basically just doing well preservation. The other point that you brought forward is basically trying to distinguish proof of work to proof

Starting point is 01:21:16 of state because there's this risk. Well, it turns out that professional miners, they will hedge this risk. And what they're interested in is the exact same thing as if holders. They're interested in a BTC denominated return, which will roughly match their opportunity cost. You know, that might be whatever, 5%. Now, how do you lock in as a professional miner like 5%. Well, it's, you use financial products. What you do is you look at your uncertainties. What is uncertain? The price of electricity is uncertain. Well, guess what? You can just go buy electricity futures. And what else is uncertain? Well, the hash rate is uncertain. Well, guess what? You can go sell hash rate futures and you've locked in your 5% profit on your BTC and now it's just a matter of executing it

Starting point is 01:22:02 over four years. And so these large professional miners, they're very much risk averse. And they're not going to take the crazy risk, you know, with hundreds of millions of dollars at play. No, what they want is a essentially risk-minimized return on your Bitcoin, which roughly matches the opportunity cost, you know, if you have an efficient market, then that's what it's going to tend towards. And so really, you know, there's this kind of distinction that doesn't really exist. And, you know, one of the sayings that we have in this space is that proof of work is just proof of stake with extra steps. And really, the risk that is being introduced can be removed with financial products. And at the end of the day, you're kind of walking back all the

Starting point is 01:22:44 differences and you can have essentially the same financial product with the same kinds of risks and the same kinds of returns. Guys, this has been a fantastic conversation. And from my perspective, and I bet a lot of bankless listeners will agree, this has probably been the best of proof of stake versus proof of work conversation. In history. That's ever been put out on crypto. So we appreciate both of you for having this very collegial conversation, for arguing points,

Starting point is 01:23:10 and for bringing a lot of rationality to what is otherwise as somewhat tribal and irrational conversation. So we appreciate you both. But it's now closing argument time. So just have a final question for both of you. I'll start with Justin since Lynn started with her part first. So I want to ask you this question, Justin. Why is proof of stake the best way to create a crypto money? Summarize it for us. Right. So when we want to build a money, like the thing that we want to try and achieve is monetary premium. And it turns out that in the context of monetary premium, it's like a, you have this competitive landscape, right? Maybe Bitcoin and gold are competing for monetary premium.

Starting point is 01:23:51 And it turns out that the reason why you have this competition is because you need society to kind of come to consensus on one particular asset to endow it with this kind of magic economic energy, which is monetary premium. And so what we need is a shelling point, a coordination point to focus our attention on one particular asset. And so really what we want to ask themselves is which of proof of work and proof of stake distinguishes itself, basically stands out relative to the crowd. If it was only proof of stake in isolation, in a vacuum, that could work fine for monetary

Starting point is 01:24:31 premium. If it was just proof of work, that could also work fine as the internet of value. But it turns out that we have this competition, and so we need to start comparing them. And there's various ways in which we can compare them. We can compare them in terms of economic security. This is one of the things that's most mind-boggling for proof of stake, and I haven't really made it explicit. So let me try and make it explicit.

Starting point is 01:24:55 For every unit of economic security, so for example, for every $100 of economic security, the consensus needs to pay for that. And how does it pay for it with issuance and transaction fees? and that's about $5 per year, right? Because that's the APR that you give to your stakers. Now, if you look at proof of work, the maintenance cost of $100 of economic security is roughly $100 every single year.

Starting point is 01:25:26 So the cost is much, much higher, of roughly 20x higher. And so that kind of means several things. But one of them, it means that for much, much lower issuance, you can have a much, much higher economic security. and we're already seeing this. The beacon chain has $32 billion of economic security. There's just the market cap of all the EF state. And if you look at Bitcoin,

Starting point is 01:25:47 we have about $10 billion of economic security. And this is using very, very fresh numbers. It's using numbers from the grid purchase from Intel. And if you want the detail, I can give it to you, but basically it comes out on the order of $50 per terra hash second. And there's about 200 million terahash per second. and so you get roughly an echoed security of $10 billion. The other thing that it unlocks for you is the possibility for a decreasing supply,

Starting point is 01:26:18 and this goes back to the meme. The fact that you have a 20x improvement in economic efficiency means that you don't need so much issuance, and so there is a possibility for transaction fees when they're burnt to be greater than the issuance. And that, again, is a distinguishing factor. It's a distinguishing factor because from a scarcity standpoint, we can build systems which are better with proof of stake versus proof of work. And then we want to look at the non-quantitative aspect, instead the qualitative aspects.

Starting point is 01:26:51 And here, for security, the really, really big one is that we're empowering the community, the social consensus to do its job, to act as a backstop in case the consensus participants abuse their power, which has never happened. in the history of Ethereum or really in blockchains, but could happen in theory. And if it was, if such an edge case were to happen in the context of Bitcoin, it is my belief that the community doesn't have this backstop power. And so to summarize, really, I think that a proof of stake system can really stand out because it has much, much bigger security, both from a quantitative standpoint and the qualitative standpoint.

Starting point is 01:27:34 And then that unlocks memes that are backed by fundamentals. These are real memes in the sense that they spread virally and they're very dense, but they're also backed by real fundamentals behind them. Lynn, closing arguments on your side, why is proof of work the best way to create a crypto money from your perspective? So historically when we look at things that acquire a monetary premium, it's the things that are the hardest, the things that are the most immutable, the thing that, you know, technology cannot come in and find a better one or cannot increase the supply of. And so essentially what you want is something, a commodity or an asset that is vast majority of its value is the monetary premium.

Starting point is 01:28:17 And very little of it is utility premium. And that's an example with, say, gold, where the vast majority of it is held for its monetary premium. And very little of it is used in industry as a, you know, percentage of its value compared to something like oil that is, you know, entirely. for its utility value, and you have things like silver that are somewhere in the middle. And so if you were to go about, say, designing a blockchain system and he wanted to maximize its monetary properties, you would make one that, you know, that almost the entire purpose of it is to be money, where you would sacrifice everything else in order to make the best possible money. And so, for example, if I, you know, want to make the best possible fork, it would just be a fork.

Starting point is 01:29:00 It wouldn't be a fork and a spoon and a knife combined together because that instrument is going to be worse at all three of those things than the three separate things are at their own field. Right. So basically, the closest thing we're going to put perfect money is something that is extraordinarily as simple as possible. And, you know, he talked before about, you know, how complexity works itself out over time, right? So that complexity is kind of a short-term thing, but then it becomes less relevant as we look out in the future. I would say that history shows that's not really the case. And so, for example, you know, up until like literally three years ago, the U.S. Air Force used adent floppy disks as part of their nuclear code launch process, right? They had mainframes and they had sloppy disks. And that sounds hilarious, right? It sounds like they have to upgrade. But it's actually the whole point is they kept it as extremely simple as possible. They updated very slowly. They wanted it disconnected from everything else because. when it comes to the software that manages the nuclear system, you want it to be absolutely rock solid. You want it to do nothing else other than not have bugs. You want it to work when you want

Starting point is 01:30:07 it to work. You don't want it to accidentally work when you don't want it to work. And you see that with bank software. You see that with like, you know, the most extremely secure things purposely change very slowly over decades because, you know, any new complexity adds risks, even though, you know, we're increasingly capable of handing complexity. When it comes to the absolute most critical things, we move very slowly and keep things as simple as possible and we don't combine it with other things. And so when it comes to, say, a money that is suitable to, you know, put your corporate treasury in or that you're going to allocate part of your endowment into or that as an

Starting point is 01:30:45 individual you might want to hold 10% and more of your net worth in. Or, you know, if these things get big enough, if you're a sovereign wealth fund or if you're managing the sovereign reserves your country, represent. setting decades of accumulated trade surpluses, what asset do you put that in? And so historically, the best one's been gold. And so now we have this, you know, potentially these new competitors that can come in and do it. And what would you select? You'd select one that is the most decentralized, the most immutable, the one that doesn't sacrifice any of those characteristics to do other things. Now, it doesn't mean that other systems couldn't be valuable as well, right? So just because

Starting point is 01:31:19 gold has value doesn't mean Tesla stock does not have value. They're just two totally different things doing different things. And the last thing I want is like some sort of weird merger of like gold and Tesla stock, right? So it's like I don't want them to compete in that realm. And so I would say that the reason that proof of work makes for the ideal money is that it's the simplest system. It's the most resistant in the sense that it's like, you know, it's non-violetile memory rather than volatile memory. It doesn't have to be continuously online. It's kind of self-verifiable, self-correcting and requires the least amount of governance. And then when you combine that, you, you know, even that's not enough. You have to combine that with something like small nodes and various other

Starting point is 01:31:59 measures that help ensure immutability. And even then, you can never be sure it's all about, you know, basically aligning the probabilities because there's more ways to fail. There's more ways to accidentally become centralized and bloated and buggy than it is to preserve decentralization and to minimize a chance of bugs or security flaws and things like that. And so I would say that the perfect money is willing to sacrifice just about everything else in order to have the perfect attributes of money where its main purpose is to be held and occasionally transacted with compared to something that is trying to be a Swiss Army knife and to do multiple things while also being money. So that's how I would view this whole ecosystem. And that's why I separate

Starting point is 01:32:40 assets that are trying to be money versus assets that are trying to be operating systems, essentially. What a fantastic conversation. I want to once again thank you. Lynn Alden and Justin Drake for joining us and having just the best debate I've ever heard, the best conversation I've ever heard about proof of work versus proof of stake. Thank you. Thanks for having us. And also a special thanks to Lynn Alden because I know bankless definitely liens Ethereum pretty heavily.

Starting point is 01:33:05 So coming into what other people might perceive as the away team, I appreciate that as well. Someone once called David and Heath Maximilist, I think. Thank you, Lynn. We definitely appreciate you. Action items for you today. Wow. Bankless listeners, what can I say? I mean, first thing you got to do is just like stop what you're doing and go listen to that episode again. I think it was that good. And there's so many takeaways. That's what I'm going to do as soon as we get this edited and downloaded. Also, of course, Lynn Alden has her proof of stake article, which we referenced in this episode. We'll include a link to that in the show notes. Justin Drake rattled off some numbers at the end on ETH versus Bitcoin economic security. We'll get those numbers for you in the show notes. as well. Risk and disclaimers. Of course. None of this has been financial advice. I don't even know if it's consensus algorithm advice. But we definitely know crypto is risky. Defi is risky. You could definitely lose what you put in, but we are headed west. This is the frontier. It's not for everyone,

Starting point is 01:34:04 but we're glad you're with us on the bankless journey. Thanks a lot.

Bankless - The PoW vs. PoS Debate | Lyn Alden & Justin Drake

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